RiBIA

Key Risk Indicators

When we talk about Key Risk Indicators (KRIs) the important word is indicator.
KRIs dont tell you necessarily that a risk HAS happened, they tell you that it MIGHT
have happened or that it might be GOING to happen. So we cant equate event capture
and monitoring to KRIs

The next most important word is key; we dont want to build KRIs for every one of
the, possibly, thousands of risks in our Risk Database.

KRIs are early warning indicators that suggest that, if action is not taken, some
significant detrimental event may affect the organization. The key word here is early; it
is no good identifying the possibility of a significant adverse event that is likely to occur
tomorrow, you have no time to put in place remedial action.

So, for an effective KRI we need timely data that indicates the possibility of one of our
key risks materializing in the foreseeable future. How do we decide what this data is?
Well, one useful source is to understand what circumstances have led to a risk occurring
in the past; this is called a risk driver. For example, our Accounts Payable function has
the risk of non-payment or late payment to suppliers; now, in the past, this risk has
occurred and it did so during a time when there was a high turnover of staff in the
Accounts Payable function. If we set up a system to record the turnover of staff, by
function, say, quarterly, we would be in a position to highlight the possibility of this risk
happening again and maybe mitigate it by pulling in staff from other functions.

With hindsight it is easy to see that a crisis could have been averted if Barings Bank had
had in place a KRI related to the increasing value of Margin Calls!

So, when designing KRIs it is important to identify the risk drivers for each of the risks
you are going to work with. This is best done as part of the Risk Profiling workshop;
once all risks have been identified select the most important ones, those with high impact
and/or high probability, and, by discussion with the workshop attendees, identify what set
of circumstances would give rise to the each one. Once this is done you are in a position
to design some KRIs.

There are two main types of KRI:

Leading;
Lagging.

Leading
These provide early warnings of potential future losses; i.e they are before the fact and
would include such things as Causal Indicators used to monitor the root causes of the risk
event.

Day 3
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 RiBIA
Lagging
These indicate that a risk might have occurred; i.e they are after the fact and would
include such things as Incident Indicators, Loss Events or Near Misses.

Day 3
HO 7
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